And The Crystal Ball Says The Pharma Future Is Improving

After so many years of dismal performances and disappointments, Moody’s Investor Services has revised its outlook for the global pharmaceutical industry to stable. Why? The ratings agency believes earnings should rebound next year as the deluge of patent expirations on big sellers finally slows down. Since 2007, Moody’s has, in fact, maintained a negative credit rating on the industry, but now believes the worst is over.

“The stable outlook reflects our view that the worst of the industry’s blockbuster patent expirations has passed,” says Michael Levesque, a Moody’s senior vp, in a statement. “Although industry earnings will still be affected by very recent patent expirations, earnings for large, branded (drugmakers) will reach a trough point in late 2012 and rebound in 2013.”

Some global drugmakers, however, are not expected to fare as well as others. For instance, he cites Bristol-Myers Squibb and AstraZeneca, which still face “year-over-year” declines in earnings during the rest of this year and into 2013. Just the same, the next 12 months “will be less onerous than the past 12 months, when blockbuster drugs like Lipitor and Plavix” began facing lower-cost generic competition.

But while the worst may be over, that is not the same thing as saying happy days are here again. Levesque believes the industry “remains challenged by a difficult regulatory approval environment for new products, and by areas of research that are still seeing limited success.” Alzheimer’s is cited as an example, which is not surprising, given the recent setback experienced by Pfizer and Johnson & Johnson, and mixed showing by Eli Lilly (read here and here).

Other problems include efforts in numerous countries to contain costs, particularly for prescription medicines, which is accompanied by an increasing use in generics. Global spending on brand meds is projected to increase from $596 billion last year to $615 billion in 2016, mostly in developed markets. By contrast, global generic spending is expected to increase from $242 billion to $400 bilion to $430 bill

ion by 2016, of which $224 billion to $244 billion of that increase is forecast to come from spending on lower-cost generics in emerging markets, according to IMS Health (see this).

Of course, this benefits generic drugmakers, such as Teva Pharmaceuticals and Watson Pharmaceuticals, but they also face ongoing price erosion, Levesque notes, and tougher manufacturing compliance that will cut into profits. However, this issue is starting to plague brand-name drugmakers as well. Novartis, for instance, is facing scrutiny at plants in different countries and has lost sales of several key products this year (read more here).

I've followed the pharmaceutical industry since 1995. This ride began at The Star-Ledger of New Jersey and continues with Pharmalot, which I have run since 2007. Along the way, I was also an editor at The Pink Sheet. Before covering pharma, I worked for several years at New ...